A Look Inside the American Express Rewards Program

Payment card-based reward programs have evolved into an essential feature for every tier one credit card issuer. TowerGroup estimates that 70 percent of spending by credit card issuers is associated with products that offer loyalty benefits to cardholders. Successful loyalty programs have been proven to improve response rates, increase customer spend and reduce account attrition.

American Express Co. pioneered the concept of rewarding customers for their loyalty as part of their spend-centric strategy - and commercial banks have long sought to reenact the company's decades-long success with the concept. New research from TowerGroup notes that American Express's card business model is built on a premise that the card product can generate more revenue by capturing and leveraging information about cardmember spending requirements, than by meeting its cardholders' lending needs.

American Express operates on a platform that is different from the branded networks of MasterCard and Visa because it controls the customer and merchant base. Controlling both sides of the transaction gives American Express unique access to both buying and selling information. The company uses this closed payment loop as a strategic advantage, building merchant and consumer relationships and then leveraging its reconnaissance on purchase habits to customize its rewards offerings.

While banks may not be able to emulate this specific feature of American Express's business model, they can and should map their own strengths to a closed-loop rewards program. These strengths include an open processing network, universal acceptance, broader customer selection, and a natural path to other retail banking products.

A new TowerGroup research report titled "Lessons in Loyalty: A Look Inside the American Express Rewards Program" by Brian Riley, senior analyst in the Bank Cards practice, illustrates how American Express differentiates its loyalty program with a customized approach. The report also offers insight to other bank card issuers on how they can leverage some of the competitive features that have given Amex an edge in the loyalty game.